The New Destination of National Savings  

The pioneers of Sovereign Wealth Funds (SWF), which are government-controlled giant investment funds, are oil-rich countries. Their purpose is to steer their savings in accordance with changing global conjuncture. The reason why SWFs are also seen as “dangerous” is their preference for strategic sectors in countries they invest

SWFs, which are known as Government Funds, have been recently mentioned with banks that wrote down debts one after another. SWFs can be defined as government-controlled giant investment funds. Especially petroleum exporting countries resort to putting the national savings, which they have accumulated thanks to increasing oil prices, to use with the help of SWFs they set up. The purpose of these funds whose risk distribution is diversified is, of course, to earn higher returns. In addition to this, they serve many secondary purposes, too. Some of them (as those in Russia) grew out of the need to keep revenues coming from commodity exports in a special fund for the purpose of stability; some of them (as in Abu Dhabi) grew out of the need to support national development and some of them (as in Norway) grew out of the need to meet public pension obligations. It is said that Brazil whose foreign-exchange reserves have rapidly grown in recent years is about to set up a SWF as well. Thought as a stability fund, SWFs are a reflection of both lessons taken from the past and of the changing financial order.

The pioneers of this trend are oil-rich countries which want to prevent money from wearing away and to cover themselves against the possibility of a fall in oil prices. In the past, countries used to invest their foreign-exchange reserves in the securest liquid assets and this was usually the U.S. dollar. But high current account deficits suffered by the U.S. has caused the countries which have been increasing their foreign-exchange reserves to use their resources more profitably and in strategic ways. SWFs have served this need. The Norwegian government manages one of the 4 funds which have different purposes and names. The remaining 3 funds belong to Singapore, United Arab Emirates and Russia. These 4 funds constitute two-thirds of the total SWF portfolio in the world. The total value of the Norwegian fund is 320 billion dollars. Management of the fund which was formed within the Ministry of Finance is carried through a company connected to the Norwegian Central Bank.

The Singaporean fund, which was established in 1981 in order to direct foreign exchange reserves to wiser investments, totals 330 billion dollars; while Abu Dhabi’s national fund ADIA ranks first with a market capitalization of 875 billion dollars. The ranking based on funds all of which have assets over 100 billion dollars, which was made by Dr. Gerard Lyons, the chief economist at Standard Chartered, and is named as “The Super Seven” is as follows: Abu Dhabi, Singapore (GIC), Norway, Kuwait, China, Russia and Singapore (Temasek). While the present market capitalization of SWFs is thought to be 2.2 trillion dollars, this value is expected to reach 13.4 trillion dollars by 2017. According to Morgan Stanley, however, SWFs market capitalization will be 12 trillion dollars by 2015. These values are calculated excluding official foreign-exchange reserves. When it is kept in mind that the total amount of official foreign-exchange reserves in the world was around 5 trillion dollars by January 2007, it is understood how considerable the market capitalization of SWFs. In fact, we talk about an investment mechanism here that is of the same size with hedge funds which have a market capitalization of 2.5 trillion dollars. SWFs also invest like hedge funds. Another advantage of these funds is that they are not similar to hot money. 

The Majority of Them Do Not Inform the Public

Naturally, SWFs also bring their own problems along with. A lot of questions concerning the management of these funds occupy minds. Institutional structure, risk management, transparency and accountability of the aforesaid funds are very important. Despite that, while some of these funds (for example, the Norwegian fund) stress transparency about their activities, again some of them do not provide any information to the public and this approach contradicts with the understanding of professional management. Especially the European Union (EU) countries have begun to take a series of measures against SWFs. EU countries, chiefly Germany and France among them, want to stop these funds moving about freely in financial markets. That’s because they perceive as threat the possibility of these funds’ being used as a foreign policy instrument by the countries which own them, in addition to their goals of deriving benefits and of becoming key players in global economy.

On the other hand, the fact that a new type of investor emerged in the world decreasing the importance of developed countries as a source of liquidity does not suit their purpose either. Just as the sale of strategically important companies is not allowed in some countries, acquisitions of funds are also closely watched. Cross-border nationalizations by these funds are restricted by not allowing the sale of important companies. The prevention of Arabs from buying shares in American ports and forbidding Russians to acquire American arms companies can be given as examples. In such circumstances, developed countries intervene. Developing countries, including Turkey, try to attract investments. Many sectors are included into SWFs investment portfolio. Chief among them are technology and finance companies. Abu Dhabi government came to the rescue of Citigroup which wrote down 6.5 billion dollars as loss following the subprime mortgage crisis. The state-controlled investment fund ADIA has become the largest shareholder in the company holding 4.9% of Citigroup for 7.5 billion dollars. Before Citibank, the fund bought 8% of shares of Advanced Micro Devices (AMD), which is one of the largest microchip producers in the world, for 622 million dollars. Again, Abu Dhabi funds own 7.5% of Carlyle which is the largest private investment fund. Additionally, the fund is among the large shareholders of News Corp. which belongs to Murdoch, Procter&Gamble, Hewlett-Packard, PepsiCo, Time Warner and Walt Disney, Four Seasons Hotel. 

After Citigroup Also UBS Resorted to Government Funds

UBS, the largest investment bank of Europe, reported a 4-billion-dollar loss in October 2007. Following upon Citigroup’s steps, UBS also resorted to government funds for recapitalization. The recapitalization of UBS was carried out by Singapore’s Government Investment Corporation (GIC) and by a Middle Eastern investor whose name was not specified. UBS carried out this 11.5-billion-dollar operation with reporting additional loss and completed the process, just like Citigroup, through equities which will be exchanged for shares later.  Another example for the issue is China’s investing 3 billion dollar for the initial public offering of American private equity firm Blackstone. Deutsche Telekom, 4.5% of which was bought by Blackstone and 2.2% of it later by the Dubai fund, has been another SWF operation that caused the German government to worry.  China, foreign exchange reserves of which rose to 1.3 trillion dollars by mid-2007, announced it would transfer 200 billion of this amounts to the SWF which is to be established. While country’s foreign exchange reserves are expected to reach 2 trillion dollars by the end of 2009, the government fund is expected to reach 600 billion dollars. Naturally, China’s “government fund” signals it will invest 200-300 billion dollars within two years in various fields and in different countries.  The Qatar-based investment fund Delta Two which has previously bought 24% share of Britain’s third retail chain Sainsbury made another offer of 17.8 billion euros for Sainsbury in July 2007 and later withdrew its offer. Similarly, Dubai Ports of United Arab Emirates bought P&Q, one of the oldest port operators of Britain, in 2005 for 4.1 billion euros. Dubai funds are among the large shareholders of the Japanese electronic giant Sony, American NASDAQ Stock Market, London Stock Exchange and of Och-Ziff which is among giant hedge funds. 

Turkey is among the Investment Regions of SWFs

Singaporean Temasek Holding, which is one of the pioneers of SWFs, involves in important acquisitions worldwide although nearly 50% of its investments are made in Singapore. Some of the companies it owns which are among Singapore’s largest corporations are; Singapore Airlines, SingTel, DBS Bank, PSA International, SMRT Corporation and Singapore Power. Temasek Holding has become known in Turkey through the consortium it set up with Akfen in the privatization of Mersin Port. PSA, one of the affiliated companies of Temasek, and its partner Akfen came up with a 755-million-dollar offer in the tender exceeding that of the nearest offer by 200 million.

Banking is another sector in Turkey in which Temasek takes an interest. Having first appeared in the partnership process of Garanti Bankası, the holding lost the race for partnership to the global giant General Electric (GE). Although it failed to set up a partnership, it was learned that Temasek managers came to Turkey and held talks taking an interest in Alternatif Bank; but nothing came out of this yet. Temasek’s latest attempt regarding Turkey was its selling Raffles International Hotels&Resorts to the U.S-based Colony Capital for 1.7 billion dollars; because Swissotel which operates also in Turkey belongs to this group. International investment bank Goldman Sachs has transferred its shares in TAV Havalimanları Holding, which accounts for 3.2% of the company’s capital, to Kuwait Investment Authority. The Kuwaiti fund also bought 50% of Turkey’s biggest shopping mall (Cevahir), which was held by Istanbul Metropolitan Municipality, for 750 million dollars and 2.5% of Halkbank’s publicly traded 25% for 185 million as well.  Dubai Holding, however, has formed a new company named Sama Dubai bringing all real estate investments within this structure. With this change, management of 5-billion-dollar real estate investments the holding has been carrying on with the Istanbul Metropolitan Municipality was thus transferred from Dubai International Properties to Sama Dubai. The company which bought the IETT land in Levent/Istanbul for 1,153 billion dollars in the tender, has not paid the amount and began to wait due to lawsuits. Besides, after buying 60% of Taib Bahrain Bank which operates in Turkey, Dubai Holding has entered into Turkey although indirectly. 

News and comments issued about SWFs are not only about their large-scale investments. A lot of people see them as a risk to their countries attaching political meaning to their activities. Some countries are even quite worried about these attempts. Actually, the approach here is not, “Why are foreigners buying our strategic sectors?” But when states get involved in the issue, this question may come to mind: “Why should foreign states control some of our sectors?” Nobody wants the Russian natural gas and oil monopoly Gazprom to control energy distribution mechanisms in other countries and even Airbus. The acquisition of Barclays Bank and ABN Amro by Chinese and Singaporean governments may give a creeping sensation. The desire of Qatar’s government to acquire the British supermarket chain Sainsbury creates discussions. However, when UBS resorts to SWFs through recapitalization after reporting loss, no one complains about that and no one sells the shares he holds. 

There Came a Time When the Tide Turned… 

It seems that the process already started to run the other way around… Western financial institutions which saw the Asian Crisis in 1997 as a rare opportunity to acquire Asian companies which lost value are today dependent on state funds of Asian economies and their financial institutions’ facilities in order to find fresh resources for healing their wounds. It is apparent that Asia takes its revenge on 1997 albeit with a ten-year delay. Brazil, Russia, China and India which were deeply wounded by the considerable falls in petroleum and commodity prices during the crisis, now cause Western economies to worry much. While Suppiah Dhanabalan, termed as Warren Buffet of Asia, and the Singaporean government fund Temasek managed by him, bought 91.7 shares of Merrill Lynch for 4.4 billion dollars, the real Warren Buffet surprised everyone with his decision to decrease his investments. Before that investment, Temasek has also bought 11.6% of Standard Chartered’s shares for 4 billion dollars.

Government funds, market capitalization of which is expected to reach 2.2 trillion dollars, nowadays become “savior” partners with companies and banks that needed “liquidity injection” after the U.S. mortgage crisis. The situation has even come to such a point that the corporations which were affected by the credit squeeze and carried potential losses got involved in “find the money and write down the loss” effort. Banks or companies, who have such losses but “could not find the money” yet to be able to write down the losses, have already turned their gaze at these giant government funds. It seems that the process of gradual acquisition of Western financial institutions by Asian and Middle Eastern investment institutions is poised to be reflected also in real sector companies. Following the Asian Crisis of 1997 we have observed that U.S.-based real sector companies bought retail chains, insurance companies and even pharmaceutical companies in Japan and South Korea with Daewoo chief among them. Today, the process seems to run the other way around… While 10 years later Ülker came to buy Godiva managing its way among so many global chocolate and confectionery giants, the Indian-based Tata also struggles to buy Land Rover and Jaguar from Ford for 2 billion dollars. Media companies are also under close scrutiny… Having suffered a fall in advertisement revenues for a lot of reasons, media companies are also waiting to be bought by Asian companies. The European Commission has expressed grave concerns over the acquisition of energy and telecoms companies in the union countries by Asian, Middle Eastern and Russian government funds. These worries in the developed countries are being talked about in wide scale meetings.

 Lastly, the leading finance ministers of the world have called for action to make rules regarding government funds in order to render their investments distinct and to ensure they are compatible with clear business guidelines. Of course, this step is a reflection of the worries over the plans by Russian and Chinese companies together with those of the petroleum exporting Middle Eastern countries to acquire banks, companies and real estate in the West. While the ministers say in their statement that cross-border investment usually “makes great contribution to global growth”; they add that in the case these investors are governments themselves, the IMF, World Bank and institutions representing the advanced industrialized nations should be involved in the process of laying down rules. This call for a “best practice” law concerning government-controlled funds is an implied warning. In the statement, governments are advised not to use these savings to affect the political climate in countries where they invest in, and not to make investments with political motivation for example; with a view to keep a rival country’s sector under control. The statement alludes to this kind of practices as “risk management” and “responsibility.” This call for a voluntary “best practice” regulation does not pass beyond saying countries should not make investments with political motivations. Officials who were involved in the preparation of the statement claim that extreme caution was taken to prevent the statement assuming a reproving view on Russia, China, Saudi Arabia and other investing countries. 

Does It Influence Political Decisions?

In addition to having made calls for laying down voluntary best practices for months, the Bush administration has even previously wanted the IMF and World Bank to help prepare an outline of this. But the bank and the fund resist the demand to pass beyond a call for open investment and share management strategies. However, Robert P. Zoellick, President of the World Bank, says bank’s role is not about advising countries not to do things they determined to be in their national interest. Saying, “This is an issue of national jurisdiction,” Zoellick emphasizes the U.S., Canada and Germany have already established their institutions to block investments that may pose danger to national security and claims the decision should be left to governments. American officials say there is no evidence yet showing political decisions are applied through government fund investments. But there is a concern in Europe about Russia’s using its own SWFs in buying pipelines and other energy infrastructure through the state-controlled oil companies. As it is seen, Asia takes its revenge on the last 10 years and retaliates for the treatment it received in the past. Let’s wait and see if Turkey will take its place in the process provided that it stabilizes its economy and decreases its current account deficit by adding new one to such examples as, Ülker’s acquisition of Godiva and Garanti’s carrying its Bonus brand into Romania… It cannot be said that these funds are managed professionally, but if the hostile attitudes toward government funds are controlled, healing the wounds in financial sector caused by the international banking crisis will not be as hard as it seems. The real question is: Can there be a free market system when states control their neighbors’ economy? The answer will be received in the coming days…